The tax rivers and President Buhari’s latest value added trouble (VAT)

By Mayowa Tijani

On November 27, 2013, a group of uniformed men destroyed 240,000 bottles of beer in Kano state, northwestern Nigeria. These uniformed men are called officers of the Hisbah Police. On the same day, these same men destroyed 8,000 litres of Burukutu, a local alcoholic brew popular in the country. They said they were cracking down on “immoral behaviour”. 

Aminu Daurawa, Kano’s Hisbah Police chief at the time,  said at the “bottle-breaking ceremony” that he had “the ardent hope this will bring an end to the consumption of such prohibited substances”. This was 2013, but as far back as then, there had been a lot of criticism of the decision to destroy millions of naira.

In 2020, the same thing happened: This same religious police unit destroyed 1,975,000 bottles of beer, estimated to be worth about N200 million. The practice has gone on from 2005 till date.

Every time this happens, Nigerians who do not align with this idea call out the hypocrisy of the Kano state government. The argument is that Kano state receives billions of naira in value added tax (VAT) from the sales of beer in other states, but destroys beer as immoral. In other words, the taxes from beer in other states can be spent in Kano, but beer cannot be accommodated in Kano.

Experts argued that states that destroy a certain commercial good or service should not receive VAT made on that good or service. But as the Nigerian story goes, nothing changed.

Kano still gets VAT on beer sales in other states to date. But as the conversation on the devolution of power and resources grows louder, states have begun considering spending their own VAT in their own states.

If all this is still strange to you, let me attempt a breakdown: 10 people work really hard, another 10 work moderately, and 16 others virtually do not work at all. But at the end of the month, they all bring in the monies they have made and then share them almost equally. 

The first 10 people bring N100 (at N10 each), the second 10 people bring N50 (at N5 each), the last 16 people bring N16 (at N1 each). Then N100 is added to N50, and then to N16, and the total N156 is shared between the 36 people almost equally.

It means the people who brought in N10 each will now get less than N5 when all is shared. While the person who brought in N1 will get more than N4. This is seen as unfair to the hard workers — and this is the story of Nigeria’s VAT structure. This is perhaps an oversimplified expression of the situation, but it gives an idea of what is happening.

RIVERS REVOLT AND LAGOS LAWS

Nyesom Wike, governor of Rivers state, and the legislative arm of the state passed and signed a law to keep VAT within the state and not remit to the federal government. The federal government through the Federal Inland Revenue Service (FIRS) challenged Rivers state at the high court but the judge ruled in favour of the southern state.

The federal government is still fighting to maintain the status quo, but Wike says Rivers state will keep the taxes in-state. Lagos state is also working out a law to replicate the situation in Rivers. Both states generate some of the highest VAT in the country.

Lagos generates about N500 billion in VAT annually, according to the state assembly, but by my calculations, the state gets less than that in return. States that generate less than 10 percent of what Lagos brings to the table, also enjoy the Lagos’ bounty.

If Rivers and Lagos win the battle to keep VAT in-house, then the devolution of resources may have begun in Nigeria. But like I said, this is a battle. It is only a single phase in an age-long war around the autonomy of states.

If the federal government loses this battle, what happens next will be for oil-producing states to say, “oh, maybe we can keep our oil revenue, too”. Then the federal government becomes broke-broke.

States that do not produce oil or general high VAT would no longer be able to meet their obligations — salaries will be unpaid, subsidised education will suffer, constructions will come to a halt, a lot will change.

On the flipside, oil-rich states, and a very few high VAT generating states will seem to enjoy their own money more. The inequality of states will get stark, and this corrective surgery of state revenues may become destructive. There is no easy way out.

President Buhari, the FIRS, and the entire instrument of the federal government will fight this new value added trouble to the teeth. And as history teaches, FG is always more likely to win these cases, by book or hook, or crook. But in doing so, the president must admit that there is a need to incentivise states with low productivity to do more. They must anticipate a time when they would not have VAT and oil revenue from other states.

Every state in a federating unit like ours must be ready and able to take care of itself should the Lagos and Rivers funds stop flowing.

You can reach Mayowa on Twitter @OluwamayowaTJ